Court Finds John Hancock Not a Fiduciary in Fee Case

October 2, 2014 (PLANSPONSOR.com) - John Hancock has ultimately been found not to be a fiduciary in a case alleging it charged excessive fees for investments offered in two Employee Retirement Income Security Act (ERISA) retirement plans.

The
3rd U.S. Circuit Court of Appeals agreed with a federal district court (see “John Hancock Cleared of Wrongdoing in Excessive Fee Case”) that decisions in
previous cases should apply to the argument that John Hancock was acting as a
fiduciary “when taking the action subject to complaint.” In Hecker v. Deere, for example, the 7th U.S. Circuit Court of Appeals decided a service provider
owes no fiduciary duty to a plan with respect to the terms of its service agreement
if the plan trustee exercised final authority in deciding whether to accept or reject
those terms. As in the current case, Santomenno
v. John Hancock Life Insurance Company, the participants in the Deere case alleged their plan provider had maintained discretion in selecting the funds available for selection on the plan’s fund
menu. The court noted that it was ultimately the responsibility of the plan
sponsor to decide which options to offer plan participants, so the plan
provider lacked the discretion necessary to confer upon it a fiduciary responsibility
under ERISA.

Another
case, Renfro v. Unisys, had many similarities to the Santomenno
case. In Renfro, plan participants sued
both the plan sponsor and the service provider, alleging both parties had breached a fiduciary
duty by selecting for plan investment options that carried excessive fees. Just
as John Hancock argues in the present case, Fidelity disclaimed any role in making
the final decision on what investment options to offer plan participants. Also,
as in Santomenno, the sponsor in Renfro was free to include in its plan
funds not offered by Fidelity. In Renfro,
the 3rd Circuit concluded that, because Fidelity had no contractual authority
to control the mix and range of investment options, to veto the sponsor’s selections,
or to prevent the sponsor from offering competing investment options, it lacked
the discretionary authority necessary to create a fiduciary responsibility as
to these activities. In
addition, it found a service provider “owes no fiduciary duty with respect to
the negotiation of its fee compensation.”

In
an amicus brief to the appellate court, Secretary of Labor Thomas Perez argued the Santomenno
case differs from Renfro because John
Hancock retains the discretion to substitute and delete funds from its menu, and
thereby from the plans’ and participants’ menus, without approval from the
employers or participants. “John Hancock’s discretion over ongoing fund
selection–giving it, not the employer, the ‘final say’ over plan investment
options—is much greater than Fidelity’s was in Renfro. Thus, this Court’s conclusion in Renfro that Fidelity was not acting as a fiduciary in the
circumstances of that case does not warrant a similar conclusion under the
facts alleged here,” the Secretary’s brief says.

The 3rd Circuit cited
the case of Leimkuehler v. American
United Life Insurance Co. in which the 7th Circuit rejected this precise argument describing it as an “unworkable”
“‘non-exercise’ theory of exercise” that “conflicts with a common-sense
understanding of the meaning of ‘exercise,’ is unsupported by precedent, and would
expand fiduciary responsibilities under [ERISA] to entities that took no action
at all with respect to a plan.” Moreover, the 3rd Circuit added, “whether John
Hancock could substitute investment options on the menu of choices from which
the plan sponsor could select investments for the plan is not relevant to the injury
that participants allege—charging excessive fees.”

The
appellate court said in its opinion that fund selections and expense ratios are
“product design” features of the type that Leimkuehler
concluded do not give rise to a fiduciary duty. In Leimkuehler, the 7th Circuit also noted that the expense ratio for
each fund AUL offered was fully disclosed, and the plan sponsor “was free to
seek a better deal with a different 401(k) service provider if he felt that
AUL’s investment options were too expensive.”

The
3rd Circuit concluded that, even if the retirement plan sponsors in the current
case were incentivized to select certain funds by John Hancock’s promise of indemnification
in a fiduciary warranty it offered, the trustees still exercised final authority
over what funds would be included in the plans (and, by extension, what the
accompanying expense ratios would be). “Nothing prevented the trustees from rejecting
John Hancock’s product and selecting another service provider; the choice was theirs.”

The
3rd Circuit also said it did not see how monitoring the performance of the
funds that it offers and relaying that information to the trustees, who retain
ultimate authority for selecting the funds to be included in the plan, gives
John Hancock discretionary control over anything, much less management of the plans.

Finally,
the participants in Santomenno argue
that John Hancock is an ERISA fiduciary because it has “render[ed] investment
advice [to the Plans] for a fee or other compensation.” The appellate court noted
first that “this alleged basis of fiduciary responsibility bears no nexus to
the wrongdoing alleged in the complaint: Participants allege the charging of
excessive fees, not the rendering of faulty investment advice.” Secondly, the
appellate court said that under Department of Labor (DOL) regulations, in order
for a fiduciary relationship to arise, John Hancock must have rendered
investment advice to the plans “pursuant to a mutual agreement, arrangement or
understanding.” According to the appellate court, far from showing mutual
assent to an advisory relationship, in the contracts between the plans and John
Hancock, John Hancock expressly disclaimed taking on any fiduciary
relationship.

The 3rd Circuit’s
opinion in Santomenno v. John Hancock
Life Insurance Company is here.